Euro zone bond yields drop as contagion risk spooks investors

March 20 (Reuters) – Euro zone government bond yields dropped on Monday as risks of a banking crisis kept spooking investors after UBS sealed a deal to buy Credit Suisse and some of the world’s largest central banks teamed up to reassure markets.

UBS will pay 3 billion Swiss francs (USD 3.24 billion) for Credit Suisse, and the Swiss central bank (SNB) said it would supply substantial liquidity to the merged bank.

The Federal Reserve joined forces with the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and SNB in a coordinated action to enhance the provision of liquidity through their standing US dollar swap line arrangements.

German government bond yields hit their lowest since mid-December with the 10-year yield, the bloc’s benchmark, down 15 basis points to 1.97%, after reaching 1.951%.

The spread between Italian and German 10-year yields was last at 201 bps.

“Market perception depends on sentiment as much as on facts, being driven by balance sheet exposures, hedge coverage and real-time deposit (out)flows – which are by and large private information,” said Michael Leister, head of interest rates strategy at Commerzbank.

(Reporting by Stefano Rebaudo, Editing by Bernadette Baum)